jonathan: from new york city, i am jonathan ferro with 30 minutes dedicated to fixed income. this is "bloomberg real yield." ♪ jonathan: raising the bar ahead of the g20. the u.s. looking for successful talks with china. as the growth outlook stumbles, traders reprice the rate outlook, leaving the fed looking to reclaim optionality. we begin with the big issue, the g20 in argentina. >> everything is at stake. >> hopefully we get some not bad news. >> in a trade war, nobody wins. in the long-term we all lose out.

>> we are all, in europe, worrying on this battle between china and the united states, which has to stop after a certain moment. >> the whole trade issue has now become mixed up with strategic issues. >> trump wants to appear tough on china. we are not counting on a major breakthrough. the fact is this is actually starting to impact sentiment. >> if there was a trade deal with china, it would be better than what we currently have. i think the markets would be very excited. >> if that doesn't happen this weekend, the two sides are digging in for a trade war that will run for the rest of this administration at least. jonathan: joining me is priya misra, krishna memani, and coming to us from chicago is jim schaeffer. let's begin with you, priya.

minimum condition of success, how you define success over the weekend? priya: the minimum condition is a cease-fire. a real success would be we are dropping all the tariffs. we decided there is no trade issues. we are going to go back on any of the tariffs. i really think this is much more than trade. it's trade, geopolitics, ip. this is a slow burning issue. we are going to have to grapple with this for a while. i don't think we will get a lot out of g20 but the markets are treating this like an extremely binding event. after their dinner on saturday night, do we have a framework and foundation they are going to work on? the remaining $267 billion tax is on hold? the 10% or 20%, is that pushed off the table for a little

while? jonathan: i have spent the week trying to understand where expectations are for this dinner. where our expectations for you? jim: i agree with my counterpart said. i think base case is some level of a continuation of a dialogue. the markets would welcome that and we expect that. we expect discussion between the two parties. maybe not changing what they've done to date, but providing a framework for dialogue which gives markets the idea that there will be an ultimate resolution, that is positive. krishna: clearly it makes perfect sense. a cease-fire would be good. beyond that, as the economy slows down, the pressure on the trump administration to find a resolution at some point increases meaningfully. even if we don't have a resolution, the market will continue to expect resolution. that is the key point. jonathan: this is an important point worth exploring. we wake up monday morning with a cease-fire. how willing are you to reprice interest rates at the federal reserve based on happy talk? krishna: our expectation with

respect to interest rates in 2019 are driven by one simple thing, the u.s. economy slowing down from 3.5% on the way to 2%. as long as that is the case, buying rates is a good strategy. priya: i think the market is repriced hike significantly. we were pricing in 3%, that is when we went long treasuries. i think we are well priced for growth remaining above potential. does it go below 2%? if potential growth is 1.75%, are we looking at 1% gdp in the fourth quarter of 2020? then the fed has to stop before neutral. we are pricing in essentially neutral. jonathan: the conversation we are having is whether we will trend towards something more sinister or growth? jim: we think we are below trend growth.

a lot is weighing on the economy. one of the biggest things is uncertainty of what trump policy will mean, what trade will mean. we know growth is slowing. it is about the velocity of the pace of growth and what that means from the fed standpoint and how aligned the fed will be. jonathan: what does it mean for the federal reserve? this was chairman powell this week speaking about rates. chairman powell: interest rates are still low by historical standards, and remain just below the range of estimates of that level that would be neutral for the economy. that is neither speeding up or slowing down growth. jonathan: was that a statement of fact or a dovish turn? krishna: it is a statement of fact. what is redeeming in that statement is the walk back from all the stuff they were talking about in september and august. which is, we will not stop at neutral and this artifact about neutral rates. who knows? walking back from that makes perfect sense. if they had continued on that path, it would've been a problem. this is reorienting things in the right way. jonathan: if that was the objective, perfect success. whether reclaiming optionality

means a dovish outcome for the federal reserve. reclaiming optionality could mean a series of interest rates next year the no one expects. priya: a lot will depend on the actual data. if data continues to slow, it has to come from the inflation. if you are at a hockey stick approach, you see a big spike in inflation and the fed uses that on the hawkish front. global growth is not helping. trade tariffs are not helping. the optionality also assumes the fed are looking at financial conditions. what is the change? from october 3 when chairman powell said we are far from neutral and we can go about neutral today, the data has not changed. for changed is the idea we don't have to go over neutral because financial conditions have

tightened. i see it as a little bit of a shift in the fed reaction function. apart from growth, i think they're looking at financials. jonathan: let's talk about a shift in the price of the story. rate expectations recalibrated before the powell speech. one hike for december, perhaps another through next year. tips of rolled over. you have inflation expectations rolling over. i am trying to get my head around were inflation expectations are now and whether the price of the story has gone a little too far. are you willing to fade some of the repricing? priya: i have been long treasuries since mid-october. we took it off. i don't know about going short just yet. i think the market can get a little more spooked. i think we could get another hike out of next year. i think they are cheap. rather than selling treasuries on the front end, some breakevens for that case that inflation does rise, the fed will hike more aggressively. i think breakevens have to be higher. jonathan: jim, what is your view?

our expectation for the fed is basically in line of where the market is now. we thought they would hike in december. one or maybe two next year. he has optionality to take advantage of the market data. we think he is aligned with what the markets expect and the markets will react favorably. jonathan: krishna? krishna: a lot of what was getting priced in in terms of not going to stop the visual has -- stop at neutral has been priced out. therefore if the tips are rolling over and expectations are trending lower, from an optionality standpoint, buying that option may not be such a bad thing. jonathan: let's talk about how this has been priced in to the treasury curve. we have gone from a flatness driven by the front 10 to something a little bit differently recently. priya: the bull flattener maybe a policy mistake. it might not be on the hike front. i think the balance sheet runoff is another form of policy. the fed is saying that's not an active form of policy. they are letting it run off every month. it is creating demand. the going to make another technical adjustment. what if we are at the steep part of the curve? i think it is telling you the

fed might be a little late in acknowledging that policy might be tight on the balance sheets and hikes. krishna: i think that's driven from or by the fact that the pace of slowing has picked up in a meaningful way. i think that driver have gotten the tenure rates up 10%. the market was always afraid of fed mistakes, but even the economic momentum, they were willing to give the fed the benefit. i think they are pricing that out. at some point, they are saying that effectively they will stop and go down the easing path. jonathan: are you willing to get on board with the flattening we have seen? priya: i'm almost more for that they with the view that we are still seeing easing in the system. as much as we're looking at the slowdown in growth, we don't see this u.s. economy rolling over.

we see the fed hiking in december and another in march. i think the long end stays anchored by global rates. but i do like a flattener. jonathan: guys, you going to stick with me. coming up, we get to the auction block, a leveraged loan market showing signs of sputtering. that is coming up next. this is "bloomberg real yield." ♪

♪ jonathan: i'm jonathan ferro. this is "bloomberg real yield." i want to head to the auction block now. u.s. treasury sold $28 billion

this week. we want to focus on the $39 billion auction of two-year notes. dealers received the lowest amount of notes since january. over in u.s. investment-grade, there was a bit of a bounce back. wednesday saw the most pricing since november 7 with 10 borrowers and more than $13.5 billion sold. leverage loans, offerings are getting pulled at the fastest rate since july. including deals with sorenson communications and perimeter solutions. still with me is priya misra, krishna memani and jim schaeffer. what is going on with leverage loans right now? jim: i think the market is getting a little concerned about what we saw from the earlier issuance this year. when you think about leveraged loans, generally it is logical there is a bit of demand for the asset class. it is defensive to the concerns of the market going into the year. rising rates. it is up in capital structure

and leverage credit. if we are wrong fundamentally, you get higher recoveries. that led to a lot of exuberance in issuance. we saw aggressive structures in pricing. the loans issued a few months ago were priced aggressively. they had a lot of flexibility for the underlying borrowers. you get forward into the market, you see a little volatility because of the demand pulling back. you will then see an impact. the secondary issues will reprice. the primary will have more challenges. combine that with all the volatility we are seeing in the markets and concerns about growth in trade, that leads to volatility and it is something we frankly expected. jonathan: is this something you would buy into? the average price of the loans in the secondary market is below par. is that something you find attractive? jim: we are not concerned about the underlying fundamental credit risk across the loan market. there are pockets of risk, pockets of concern and research is important. but when we see the loan market reprice, we think it is a buying opportunity. i will tell you you have to focus on bottoms of research and

analysis of each underlying credit and make sure the structures you are buying into, which i think is one of the most important things, you understand. because there could be risk inherent in the structure as the deal has challenges. krishna: we have had this discussion many times. we continue to like the loan market. the driver of that is relatively simple. spreads are not that wide. they are decent but not that wide. it is a choice between high-yield and loans. i think still, the risk reward is significantly better in loans than high-yield. jonathan: even though the fed might be pausing or slowing down on interest rates, the big attraction, at least 50% of it, was not just the credit story. it was the floating-rate aspect of leveraged loans. if rates will not continue going up, why buy loans over

high-yield? krishna: the slowdown may be more significant than we expect. in that environment, you don't want to own high-yield. you don't want to own loans either but you are better off owning loans in that environment because the prices are going to go to unless. jonathan: something i'm trying to explore is whether we have some credit issue, or if we're going through a slow inflection point? is that what we are witnessing here? priya: i think so and i think it is a general repressing across asset classes. the environment where we had qe, we had zero rates in the u.s. globally you had negative rates on the front end. all of that has compressed every asset class. we were in quantitative tightening mode. you have positive real rates on the front end. those three months treasury yields are giving almost 2.5% rate.

if i am getting that for taking no credit risks or duration risks, you have to pay me a little more than take any risks. that is getting repriced. krishna: that's an important point. that you can get cash at 2.5% is a direct competitor to any income-producing asset. having said that, if you are retired or an endowment trying to find things or a pension plan, 2.5% does not get you there. that has been the story was credit in the entire cycle. maybe in 2009 or 2010 they were extraordinarily attractive. of late, tight. they have been very the reason for that, if you are looking for income, the need for income is perennial. you have to take risks. it is a question of what risk do you like that will hurt you the least in the long run? jonathan: krishna likes loans. where do you stand?

jim: i like loans over high-yield as well. the price volatility is much lower in high-yield. i don't mind the high-yield asset class. i'm not concerned about fundamental credit risks in the market. i think defaults will remain low. ultimately that draws -- drives returns on leveraged credit. i feel good about the floating-rate component. the question is relative value. given where yields are, they are comparable to the high-yield market place right now. you have lower volatility. from a price standpoint that helps for a return profile. jonathan: does the high-yield sector should be view on high-yield sector at all? jim: it is a big driver of the returns. and the psychology of the high-yield market. oil has been a driver of growth. we have seen oil prices come off. it really way some high-yield market. even with the rally in equities host the powell comments, he saw it weigh on that. it might be driven by oil. you might see loans more because

it is a small part of the leverage loan markets. jonathan: great to catch up with you. you will stick with me. jim schaeffer, krishna memani, and priya misra. let's get a market check. twos, tens, and 30 year yields in the treasury market. yields up just a single basis point on a two-year. yields down on a 10-year by a couple. really muted price action going into a big weekend. we look at the week ahead featuring chairman powell and the u.s. jobs report. this is "bloomberg real yield." ♪

♪ jonathan: i am jonathan ferro.

this is "bloomberg real yield." it is time for the final spread. in the next week, we have the g20 dinner between president trump and president xi. jay powell testifying before congress. not many people talking about that. a crucial opec meeting, and to wrap up the week, the u.s. jobs report. still with me, priya misra, krishna memani, and jim schaeffer. it is almost like the g20 has suffocated the whole agenda. there is a lot going on next week. priya: the uncertainty around trade is dwarfing it. the report should been a big deal, but we know the u.s. economy is doing ok. i don't even know if you see the slowing in the economy we are expecting showing up in payrolls. it has to be forward-looking expectations. talk around trade, opec, all of

that will dominate. jonathan: all of the high-frequency data. one piece of five frequency data is the initial jobless claims. anything to worry about? krishna: these are highly volatile theories. i will not jump into it except for the fact that the market is expecting a downward trending growth expectations. if you see a supporting deal, you grab onto it and do things with it. at the end of the day, i think priya is right. the u.s. economy right now continues to do well. it will slow in the next year and the fed will react accordingly. jonathan: are we all suffering from confirmation bias? krishna: of course we do. jonathan: who would've thought? jim, what you looking for? jim: i would not undersell the importance of the opec meeting. trade is important. employment numbers are

important. but i think the opec meeting is important to understand with the direction is from a supply and demand imbalance we have seen. we have seen the rhetoric of the trump administration about wanting lower oil prices. how that moves between saudi arabia and russia. i think is a pretty important thing for the market going forward. once we get through the g20. jonathan: we are straight into a round of geopolitics. where is it going? for opec and the outcome of the meeting. priya: it is very hard. there is not a lot of conviction. our view is this is mostly a supply issue, not so much much demand. it should start heading higher but there is not a lot of conviction. jonathan: no one is talking about the ecb either. in a couple of weeks, a big

meeting for president draghi. krishna: i think ecb is in a far worse situation than the fed. the underlying strength in the european economy with emerging markets doing far worse than they were a few years ago. the strains are quite significant. my expectation is still that at some point, they have no choice but to stop and rates are remaining lower for an extended period. jonathan: can i get a positive rate above zero at the ecb? priya: i think they would love to, but a lot goes into that. every quarter, we have a one-off issue. that is a little suspect. when my kids make a mistake again and again, i don't buy the one-off argument. how systemic is the issue? they are running out of bonds and have to stop qe. we will maybe see the extension from summer to fall, winter. we are trying to normalize rates but i don't know if they can get there. jonathan: this is the rapidfire around. some questions really quickly for you. have we seen the high on the 10-year yield for the cycle? priya: no. krishna: yes. jim: yes. jonathan: have we seen the tights on high-yield spreads? krishna: absolutely. priya: yes.

jim: no. jonathan: deal or no deal in argentina? priya: no deal. krishna: framework. jonathan: there we go. jim: i will go framework. jonathan: that was an easy one. it is great to have you with me. priya misra, krishna memani, and jim schaeffer. great to catch up with you. from new york city, we will see you next friday. 1:00 p.m. new york time, 6:00 p.m. in london. this is "bloomberg real yield." ♪

carol: welcome to "bloomberg businessweek." jason: we are here at bloomberg global headquarters. carol: we zero in on conversations from bloomberg's year ahead summit. jason: some of the world's most respected figures spoke at this event. carol: we heard from iac and karen weaver.